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MUMBAI: The Reserve Bank of India on Friday pulled up banks for flouting Know Your Customer (KYC) and anti-money laundering norms, after it probed private sector banks such as ICICI Bank, HDFC Bank and Axis Bank following allegations that their employees were involved in structuring transactions to aid tax evasion and fraudulent transfer of funds.

"We had launched an investigation and the deficiencies have been conveyed to the chief executive officers of those banks. We have also talked to forensic auditors. Now, showcause notices will be issued to those banks and they will be asked to explain,'' said RBI governor D Subbarao. "An enquiry is in progress and we have not given clean chit to any of the banks involved," he added.

The inspection by the central bank has revealed that banks are not carrying out customer due diligence as required under KYC, AML and Combating Financing of Terrorism (CFT) guidelines while marketing and distributing third party products as agents. Some banks were also not filing cash transaction reports (CTR) or suspicious transaction reports (STR) in cases where they are supposed to. "Bank officials should do field visits that will give more feedback.

Spot checks will help — they will help identify the black cat in a dark room," said Pratip Chaudhuri, chairman of State Bank of India. It was also found that banks did not have clear segregation of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products.

However, bankers claim it's not always possible to separate sales and service staff. "We tried, but we couldn't go very far on this. We treat customers, especially the bigger clients, on a relationship basis and try to provide a one-window service,'' said Chaudhuri. Cracking down on the incentive structure given to sales staff, the central bank has asked bank managements to ensure that its employees do not receive cash/non-cash incentives directly from insurance companies, mutual funds and other third party product providers.

"Employees do not get paid by insurance companies or mutual funds — this is part of their key responsibility area. The RBI stipulation will not change the way we do business,'' said Shikha Sharma, MD & CEO Axis Bank. Banks will also have to put in place a board approved policy to avoid mis-selling and conflict of interest in marketing and distribution of own or third party financial products.

To ensure customer due diligence is adhered to, RBI has asked banks to extend KYC/AML/CFT norms to wherever third party products are sold as agents as a measure of abundant precaution. Banks would also have to maintain details of third party products sold and related records for a period and in the manner prescribed in the KYC/AML/CFT guidelines.

The central bank has also asked banks to file CTRs and STRs wherever required while marketing and distributing third party products as agents. The banking regulator has decided to issue guidelines on wealth management services offered by banks, marketing of third party products like insurance and mutual funds and bring out a comprehensive policy on KYC/AML and CFT by June-end.